Puerto Rico's Senate approved a bill, with amendments, that increases the cash-strapped island's sales tax, potentially raising revenue that will help balance the fiscal 2016 budget.
The Senate passed the measure Monday in a 14-12 vote, with an amendment to exempt certain processed foods. The amended bill now goes back to the House of Representatives, which narrowly approved the sales-tax hike last week. Governor Alejandro Garcia Padilla and lawmakers from his ruling Popular Democratic Party agreed on a framework for the tax boost May 14. The bill would raise the levy to 11.5 percent from 7 percent through March, after which it would transition into a value-added tax.
"The time has come in which we need to be responsible to the country and not do the same thing that's been done in the past," said Senator Jose Nadal Power, chairman of the Senate Finance Committee, referring to the $72 billion of the government and its agencies have accumulated. "We have obligations that we have to fulfill," he said during debate on the Senate floor.
If approved, the revenue will go toward a proposed $9.8 billion budget for the fiscal year beginning July 1.
The House had rejected a previous tax-overhaul plan from the governor last month. Time is running out for the junk-rated island. Lawmakers need to pass a balanced budget by June 30 and the commonwealth is on the hook for a $630 million payment to bondholders July 1.
Puerto Rican debt has traded at distressed levels for almost two years on speculation the island won't be able to repay its obligations on time and in full. The territory's economy has struggled to grow since 2006, and its jobless rate is double the national average.
Senator Migdalia Padilla said the tax hike would exacerbate economic woes and continue to force residents to flee from an island that has lost 7 percent of its population in the past decade.
"What Puerto Rico needs is more economic growth and less migration," Padilla, speaker for the minority New Progress Party, said during debate. "Why keep punishing the people?"
The Government Development Bank, which lends to Puerto Rico and its municipalities, will deplete its liquidity by Sept. 30 unless the island completes a planned sale of $2.9 billion of debt backed by oil taxes, according to the commonwealth's latest quarterly filing. The bank's net liquidity dropped to $1.02 billion as of April 30, from $2 billion in October.
The additional revenue from the tax boost would attract investors to the planned bond deal, according to the GDB. Proceeds would repay money the commonwealth's highway authority owes the bank and help avert a partial government shutdown.
Puerto Rico debt has rallied since the governor and lawmakers agreed on the tax plan. Commonwealth general obligations maturing July 2035 traded Friday at an average of 83.25 cents on the dollar, a two-month high, data compiled by Bloomberg show. That's up from about 79 cents May 13.
